Biofuels Market Drivers

Wally Tyner

29th-May-2009

Description: Oil and gas prices are major biofuels drivers – after the biofuels boom in 2006-08, biofuels have faced market difficulties. Government policy also plays a large role– subsidies, mandates, import tariffs. Greenhouse gas policies – US and EU require 50-60 percent reductions (20% for US corn ethanol). Advances in cellulose technology are also driving the biofuels market. In the US, with up to 2 billion gallons of shut down capacity, there is a tight link among corn, ethanol, and gasoline prices.

Policy Simulations
We simulate the following policies:
45 cent/gallon ethanol subsidy No ethanol subsidy A variable ethanol subsidy beginning at $70 oil and increasing $0.0175 for each dollar crude falls below $70 plus a variable subsidy beginning at $90 A renewable fuel standard of 15 billion gallons for corn, plus RFS 9 Combination of the RFS and subsidy Other options and combinations of options

Difference Between a Fuel Standard and a Subsidy
The fundamental difference between a fuel standard and a subsidy is who pays:
With a subsidy, the taxpayers pay the tax credits received by fuel blenders it is part of the government budget With a fuel standard, consumers see changes in prices at the pump depending on what the alternative fuel costs relative to gasoline from crude oil

To capture the higher GHG impacts of cellulose ethanol, the standard needs to be partitioned with cellulose receiving a higher proportion as in the bill

Other Ethanol Issues
An issue that will face the industry very soon is the "blending wall." That is the max ethanol that can be consumed at the E10 blending limit. Another important issue is the ethanol import tariff. Reducing or eliminating the import tariff would likely reduce pressure on corn prices and the level of domestic ethanol production if we are at the blending wall. If we eliminate or change the subsidy, the tariff likely will be changed as well. GHG emissions and land use very contentious

Subsidy, RFS and Tariff
S S + subsidy
Price

WP + tariff World price

D
RFS
Quantity

Greenhouse Gas Issues
The US Renewable Fuel Standard requires that EPA certify reduction of GHGs in order for renewable fuels to qualify for the RFS
EPA is required to consider indirect land use changes Industry and many scientists believe the measurement of indirect land use change too imprecise to include Others argue zero land use change impact not realistic

Cellulose RFS
Of the 36 bil. gal. RFS for 2022, 16 bil. gal. is specifically allocated to cellulosic biofuels The cellulose component has a type of variable incentive built in through RFS waivers:
Fuel blenders can buy cellulose biofuel RINs for the max of $0.25 or ($3.00 RBOB), in lieu of blending If wholesale gasoline is $1.50, a RIN could be purchased for $1.50; if $3.00 or more, the RIN is $0.25. Means of limiting consumer cost of the cellulose RFS

Cellulose Options
The current subsidy on cellulose biofuels is $1.01/gal., regardless of the biofuel. Technology neutral subsidy would be based on energy content, not volume as in the EU. Subsidy that varies with oil price and energy content:
Crude Price Ethanol Bio-Gasoline Bio-Diesel Bio-Butanol

40 60 80 100 120 140

0.94 0.71 0.47 0.24 0 0

1.40 1.05 0.70 0.35 0 0

1.55 1.16 0.76 0.39 0 0

1.18 0.88 0.59 0.29 0 0

Conclusions
All the renewable fuel policy options will be on the table in 2009. May see more interest in variable incentives because they cost less and do not have as many adverse consequences. Cellulose biofuels will not come on without strong incentives or a credible mandate. Climate change policies could change the whole landscape for renewable energy policy. More data and analysis is needed to resolve the GHG issues

Thanks very much!
Questions and Comments
For more information: http://www.ces.purdue.edu/bioenergy http://www.agecon.purdue.edu/papers/